Red Hat hasn't imploded while waiting for the IBM deal to close, which is a very good sign of customer traction to come.
When I lived in Brussels, there was a man who haunted a tram stop near my house. He walked around the station, declaring to anyone who would listen (or not), "La fin du monde est proche!" ("The end of the world is near!"). It has been 27 years since then, and I'm still here, but maybe we have different definitions of "near."
In like manner, Red Hat was theoretically purchased by IBM ages ago (October 2018), though the deal has yet to close. Announced in all caps, Red Hat bellowed the deal "COMPLETELY CHANG[ES] THE CLOUD LANDSCAPE," but based on its latest ho-hum earnings, perhaps the most astonishing thing about the deal is that it hasn't destroyed Red Hat's ability to close business. That may be the most promising sign of success to come.
SEE: Cloud providers 2019: A buyer's guide (free PDF) (TechRepublic)
Taking care of business
To be fair, Red Hat's earnings haven't lit the world on fire for years. The company has been predictable and solid, but also a member of the billion-dollar club. Yes, AWS grows at 45% or so on a $27 billion run-rate, but most companies can't get anywhere close to that. Red Hat, for its part, has mustered more modest growth, as highlighted by Macrotrends:
- Red Hat revenue for the 12 months ending November 30, 2018 was $3.255B, a 17.23% increase year-over-year;
- Red Hat annual revenue for 2018 was $2.92B, a 21.09% increase from 2017;
- Red Hat annual revenue for 2017 was $2.412B, a 17.52% increase from 2016; and
- Red Hat annual revenue for 2016 was $2.052B, a 14.68% increase from 2015.
On a quarterly basis, since 2017, when Red Hat's OpenShift strategy really started to kick in, Red Hat has grown by at least 17.5% each quarter (with one blip), and since the second quarter of FY 2018 that number has never dipped below 20%.
Rinse. Repeat. Snore.
This past quarter saw revenue climb a tepid 14%, with subscription revenue inching up 13%. Ditto the quarter before, when the weight of the IBM deal pushed down revenue growth into the same 13% range. Based on Red Hat's past history, these numbers are quite modest. But if we look to Red Hat's future, they're pretty remarkable.
See how they run
People, like markets, don't like uncertainty. If you've ever lived through a reorg, an acquisition, or anything else that creates uncertainty at your employer, you know how unsettling such things can be. Suddenly the watercooler becomes the most crowded place in the office as people parse any shred of news (most of it just rumor with little substance). Real work often grinds to a halt.
More worrisome still, customers tend to put the brakes on proposed purchases from vendors going through an acquisition. Perhaps they don't like the company buying their preferred vendor. (On this point, it's worth noting that IBM, more than any other vendor, is expected to see the largest exodus from CIO buyers in 2020, according to Credit Suisse's IT executive survey.) Perhaps they want to make sure the products they like won't be discontinued. Or perhaps they have another reason for hitting "pause" on their purchasing plans.
With this in mind, let's take a look at those earnings again.
SEE: Cloud migration decision tool (Tech Pro Research)
For Red Hat to be able to close business at all is a very positive sign for it (and for IBM). It's also promising that the total number of customers spending over $5 million each year with Red Hat ballooned by 33%. Driving that number is OpenShift, the company's answer to cloud-shy customers who want to embrace cloud but need help getting there. With the OpenShift customer count now exceeding 1,000, Red Hat keeps managing to generate sales even as conditions for it deteriorate.
Once the deal closes in the fall, IBM will start ramping up its expansive sales force to push OpenShift, Ansible, and other Red Hat products. It's just as certain that comp plans, territory fights, and other facts of sales life will ensure that things won't go smoothly—it's just how enterprises operate.
BUT if Red Hat's earnings are any guide, there is a huge amount of upside in this deal, even with all the headwinds factored in. Red Hat isn't setting the world on fire with its most recent earnings, but it isn't a dumpster fire either. And that's one of the most hopeful things for Red Hat employees and customers to consider.
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